The Winners And Losers In The Cyprus Drama

Includes: FXE, FXSG, GLD, SLV
by: Tom Luongo

This entire affair in Cyprus feels so reminiscent of Greece that I sometimes feel like I'm Bill Murray in the movie "Groundhog Day". Though I, thankfully, wake up to better music in the morning, I have been greeted by an endless series of headlines that, once coffee has been procured, always boil down to the same thing. All the machinations and double secret meetings, press conferences, misspoken turns of phrase and the eventual resolution was always going to reduce to this:

The euro will always be saved.

Why? Because no matter the consequences, the political elite in Europe are fully -- one could easily say sociopathically -- committed to the European Monetary Union. This commitment underscores everything I've been saying about the euro (NYSEARCA:FXE) for months now. Never once have I seriously entertained the idea of a eurozone breakup. Even if the threats of cutting Cyprus out of the eurozone were real -- which they were most certainly not -- the euro would have survived it. Cyprus was prepared to leave, but, the elites that run the EU were never going to let Cyprus pull an Iceland, thumb their noses at them and default via debasement.

We'll Always Have Iceland

Iceland -- the people, not the government -- showed the kind of political will that cannot be allowed or repeated, lest the Italians and Spanish get crazy ideas. If you want to know why the Troika keep circumventing the democratic process in these countries, it is because of Iceland, where the people told the EU and UK banks to get stuffed.

For Cyprus, like Greece before it, in the end, there was no limit to the realpolitik needed to ensure the outcome desired. Once the ECB began tightening its balance sheet after tidying things up in Greece, the fallout would land at the Cypriot banks. So, here we are a year later playing out the same script, but with a much shorter second act.

The climax of the piece, however, was exactly the same. The euro is intact. Another country's economy has been destroyed.

And when Spain or Italy become the focus next, you can expect Sonny and Cher on the clock radio every morning.

So, what happened last week in Cyprus? I've been of the opinion for more nearly two years now that Germany has been moving brick by brick towards complete financial control of Europe via the EU. Jim Rickards has called this strategy the Fourth Reich, and while that is certainly a colorful name, it's also hard to argue with. Cyprus was either getting sacrificed economically under a German boot heel or becoming a client state of Russia.

Should I Stay or Else?

To stay in the euro without impairing depositors is a loss for the IMF that pushed for it and a win for the eurozone, but at what cost?

Senior bondholders for the first time will bear some of the burden in this along with uninsured deposits. This is consistent with what you should expect when you put your money in a bank these days. FDIC insurance covers the first $250,000. After that, there are no guarantees. Before the FDIC, banks just closed and took your money. The FDIC, by the way, does not have nearly enough money to cover any systemic banking crisis here in the U.S. And, this event will serve as a warning that nothing is sacred as this debt deflationary period continues to unfold. It has woken some up to this fact.

The market correctly figured out that there will be QE to cover the bailout itself because the gambit to impair depositors failed. The euro sold off and settled at a three-month low of $1.285 after the announced deal. And while there may be more weakness as the fear plays itself out around the continent, I think this will be temporary. The size of the bailout in Cyprus is tiny compared to the risk to the euro. Now that the threat is over, what capital wants to stay in the eurozone will be returned.

We don't know the full details of the deal because they haven't been worked out but, with depositors not footing the bill directly, the net effect is that the Troika lost this round. If the speculation over at Zerohedge is correct, much of the money over €100,000 may have been withdrawn out of Laiki and Bank of Cyprus branches and subsidiaries in London and Moscow. The ECB is going to have to foot even more of the bill than is being reported now.

But, regardless of any of that, Cyprus was a moment where the U.S. through the IMF floated the trial balloon of impairing depositors, knowing full well that capital controls like that may be necessary to avoid QE to infinity. And, if they could get Russia to pay for a mess that, frankly, Germany has benefited handsomely from over the past 15 years, all the better for Mrs. Merkel's re-election campaign.

There is No There There

But this deal in Cyprus makes it clear that this strategy failed. So, we can expect more jawboning about QE ending in the nebulous future, but don't believe a word of it. Cyprus is now behind us, the only question is how much the ECB and the IMF will pay out in the process. But it's over and Cyprus is still in the euro. This is a win for the euro and a loss for the U.S. and its proxy, the IMF, along with the people of Cyprus, who will still bear the burden, but in the form of a much weaker economy.

As such, I am not surprised by the lack of concerted buying in the U.S. Treasury markets. The 5/30 TIPS (NYSEARCA:TIP) spread continues to hold 2%, which is reflective of increasing inflation expectations. The 30 year yield hasn't budged, and rallies are being faded while the Fed continues to support the price.

The swift resolution to this situation means that Brent crude (NYSEARCA:BNO) prices should stabilize as fears of a eurozone breakup subside, but I would watch for a weekly close below $105 per barrel if there is civil unrest around Europe. There will be a strong bid put under the price of gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) in this price range, though no upside momentum until the March contract expires and we know the full extent of the silver longs standing for delivery.

The most telling move in the markets since the announced deal has been the 75 pip move in the Singapore Dollar (NYSEARCA:FXSG) since Sunday night. Singapore has a lot of exposure to European banks. Last year, we saw extreme weakness in the Singapore dollar as Greece exploded into the news. As the situation resolved itself, the Sing dollar strengthened and continued to do so until the beginning of Abenomics and the massive devaluation of the yen (NYSEARCA:FXY). Now that Singapore has averted a recession and the immediate threat to the eurozone has passed, expect a strong move by the Singapore dollar back towards S$1.21 if it closes March below S$1.2344 as it re-couples with the Chinese yuan.

In the end, nothing looks different but everything has changed. The markets still look much the way they did before all of this took place, but the world in which they operate will no longer trust that it will all be okay in the morning.

Disclosure: I own a few dollars and some gold and silver. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.